Best Buy Determined to Turn Around

Best Buy's turnaround efforts have met with approval from investors so far.

It seems as if those that predicted the demise of brick-and-mortar stores, or at least their growing irrelevance, may be proven wrong in some cases. While some traditional retail chains have indeed crumbled under the pressure of growing competition from online channels, some are managing to reinvent themselves in a quickly changing market. One turnaround story that seems to be successful so far is that of Best Buy(NYSE:BBY), which only last year was all but abandoned by investors.

Turnaround strategiesIt's perhaps not that hard to understand why investors dumped Best Buy stock not too long ago. After a few years of more or less flat growth, annual earnings per share dipped to $2.62 in fiscal 2013 for a year-over-year decline of around 23%. To tackle the company's slowing growth, it has launched a turnaround project called 'Renew Blue' which is meant to cut costs and boost competitiveness. In the last year, the company has managed to cut some $390 million .

While cost cutting is the main goal of the initiative, other spear points include accelerating online growth, enhancing the company's multi-channel customer experience and growing the top line through store space optimization . One interesting way in which the company is looking to do this is a partnership with Samsung(NASDAQOTH:SSNLF), in which Best Buy has granted the Korean consumer electronics giant space in some of its stores to show off its wares.

According to some analysts, the store-within-a-store concept is extremely beneficial to Best Buy's turnaround efforts, and the move is likely to increase traffic and sales. Under the terms of the deal, Samsung is opening 'Samsung Experience' locations at some 1,400 Best Buy stores, the largest occupying around 460 square feet . The news sent Best Buy stock surging over 13%, putting its year-to-date gains at a monstrous 263%. With the move, Samsung reportedly hopes to improve its market share in the US, where it currently still trails Apple by about 16 %.

While Best Buy playing to its advantages as a brick-and-mortar retailer is encouraging, perhaps equally important is its online presence. The company has been working on revamping its website which had only around half of the conversion rate of rivals. With a new team on board running the online division, the company hopes to double its online sales. The question is, of course, whether Best Buy will be able to challenge Amazon(NASDAQ:AMZN), which for now seems unlikely at least in the online realm.

Formidable competitionThere aren't many markets that Amazon has left to crack. It has been especially successful in consumer electronics. In part, this is due to Amazon's pricing edge because the company's low-cost business structure has driven consumer prices down. However, the recent introduction of state sales taxes on many items may erode this pricing power to some degree .

While Amazon does great business in consumer electronics, it is still estimated that Best Buy's market share is roughly four times bigger. The sheer size of Best Buy's operations is expected to give the company certain scale advantages over Amazon, which also has to spread out its marketing expertise over a far wider range of product classes.

Another way in which Best Buy is looking to challenge Amazon is its new 'ship-from-store' strategy, which turns retail locations into distribution hubs. The shorter delivery routes are not only faster, but more cost-effective. According to a Credit Suisse analyst, the strategy could mean an extra $5.8 billion in sales for the awakened consumer electronics giant, as well as combat the show-rooming effect.

The bottom lineWhile it remains to be seen how Best Buy's turnover strategy will translate to the bottom-line over the next few years, analysts and investors alike have cheered the efforts that have so far materialized. The company's partnership with Samsung is an important one, and may prove crucial in order to challenge Amazon. While I am somewhat hesitant to put a 'buy' on the company due its massive run this year, the stock's continuing strength could suggest further upside.

Author

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.